I recall as a child watching my mother wringing out a washcloth over the kitchen sink. What was the point, I wondered, of pouring all that water on something only to squeeze most of it out a few moments later. Why not just pour less water on it to begin with and have that much less to wring out?

At that time, it did not occur to me that most of that water was used to get out the dirt and grime collected in the washcloth. If that doesn’t happen, then using it to wipe other things simply passes all those germs on rather than getting them poured down the sink.

Spinning in Circles

That analogy occurred to me as I was contemplating the stock market’s erratic behavior over the last two months of 2025 as measured by the SPDR S&P 500 ETF Trust (NYSE: SPY). After closing above 680 on October 31, the SPY dropped under 669 just one week later. The following week it rose above 681 only to fall below 651 on November 20.

Just as quickly, the index shot back up 681 one week later and then climbed above 689 two weeks after that. The following week it fell below 675 only to rally above 690 by the end of last week. After all that zigzagging, the index had gained a little over one percent during that two-month stretch as shown in the chart below.

So, what was the point of all that seemingly pointless activity, like a washcloth having an almost equal amount of water added and removed in very short order only to return to its original state? Despite what the most cynical among us might think, it was not to generate trading commissions that would ensure a handsome year-end bonus on Wall Street.

Conflicting Economic Data

As with the washcloth, most of that trading activity was to wash out the dirt and grime created by a sequence of conflicting and confusing economic data due to the federal government shutdown. During the shutdown we wondered if inflation was rising or falling, as we did for the unemployment rate.

After the shutdown we learned both inflation and the unemployment rate kept rising from August through October but at slow enough paces not to set off alarm bells on Wall Street. That being the case, the Fed reduced its policy rate by one-quarter of a percentage point in mid-December, precisely as expected.

Last week, the U.S. Bureau of Economic Analysis (BEA) announced that gross domestic product (GDP) grew at an annual rate of 4.3 percent during the third quarter, far above the 3.3 percent figure widely anticipated on Wall Street. Most of that gain was due to increased consumer spending and decreased imports, neither of which is necessarily healthy for the economy in the long run.

That because both of those conditions are likely to increase inflation down the road. Consumers aren’t buying more items, but they are paying more for them due to in part to recently enacted import tariffs. The fact that imports are decreasing is proof of that, even though that has the perverse effect of increasing GDP in the near term.

Interconnected Markets

All of that raises a tantalizing question heading into the new year: If none of those critical data points were known two months ago, why has the stock market barely budged from where it was before all that information become public?

I believe the answer to that question goes far beyond a simple explanation of how greed and fear manifest itself in the form of individual investor psychology, as many market pundits would have you believe. I don’t believe you or I have suddenly become more irrational than we usually are, nor do I think we have suddenly become less greedy.

However, I’m afraid that you and I have become more exposed to the volatility that accompanies the invisible but rapidly growing web of interconnected investment products controlled by currency traders, hedge funds, and institutional investors that dictate the short-term direction of the financial markets.

To be clear, this is not a conspiracy theory of any sort; each of those investors is engaging in behavior they believe will yield the greatest risk-adjusted return for their clients. And in theory that is good for the financial markets by enhancing liquidity, which in turn should result in more accurate pricing. Which it does, except when the amount of money being exchanged becomes so large that it affects prices in other markets.

Get Your Wish List Ready

So, what can you do about it? As an individual investor, there is nothing you can do to prevent it from happening, but you can devise a strategy to profit from it. A lot of good companies are going to see their stock prices whipsawed in the weeks and months to come, resulting in temporary buying opportunities if you are prepared to act quickly.

I suggest you have a short list of companies you’d love to own if only you could buy them at a price 10% less than where they are currently trading and enter buy limit orders accordingly. Given how volatile the market has become, some of those limit orders could get activated in farily short order.

I also suggest you learn to shut out the noise that accompanies extreme volatility, which only stokes fear and invites irrational decision-making. While it is much harder to do in practice than commit to in thought, this is the trick that all successful long-term investors have learned.

Limit Downside Risk

If you find that impossible to do, then consider acquiring an “insurance policy” for your portfolio by buying out-of-the-money put options on the S&P 500 Index. That way, you can cap your potential losses to an acceptable level in the unlikely event of a stock market meltdown.

For example, at the end of last week a put option on the SPY at the 620 strike price (about 10% below its current level) that near the end of 2026 could be bought for $1.90. The combined cost of that option premium plus the 10 percent dropdown works out to a maximum loss of roughly 11%, assuming your portfolio’s performance approximates that of the index (note: this strategy may not work if your portfolio consists primarily of small cap and foreign stocks).

That should help you sleep better at night and give you the resolve to ignore the daily ups and downs of the stock market. Yes, the cost of that insurance policy will cut into your future returns, but the net result should still be far greater than bailing out of the market whenever Wall Street hits the panic button.

Most importantly, it will help you avoid the transaction costs and panicked trading losses that can put your portfolio through the wringer. As always, my mother was right all along.